Top Line
Shares of Tesla Inc. fell in premarket trading on Wednesday after the electric-car maker reported disappointing second-quarter results a day earlier, a sign that investors’ patience with Chief Executive Officer Elon Musk is wearing thin as the company invests heavily in AI and other long-term initiatives while its core auto business struggles.
Elon Musk predicts that AI will be central to Tesla’s future value.
Key Facts
Tesla shares fell more than 8% to $226.57 in morning premarket trading Wednesday.
The drop compounded losses on Tuesday, when Tesla shares fell 2% by the market close and came after the company reported better-than-expected revenue but profit margins were at their lowest in years.
The company was forced to cut prices to stimulate demand due to increased competition and sluggish sales, particularly in China, one of its key markets, and its second-quarter profit fell 45 percent.
The company’s restructuring, which included massive job cuts, has also caused operating costs to soar and sparked lawsuits. Tesla has invested heavily in AI, semiconductor and robotics projects that investors worry may not generate profits for years, or at all.
Why are investors concerned about Tesla’s AI project?
Musk has repeatedly said that Tesla’s future lies in AI. The billionaire is well known for making bold predictions that are often hyperbolic and wildly optimistic, and many of his past predictions have turned out to be way off. With Musk’s vision in mind, the company has been investing heavily in AI technology and related hardware like chips and robots, and like other companies developing this technology, its stock price has soared on the wave of optimism around AI. Investors are increasingly concerned that stock prices are rising disproportionately based on speculative judgments about AI’s future rewards, and that the sector is forming a bubble that could soon deflate or, worse, pop. This trend has been especially pronounced at Tesla, with some viewing it as an AI company that happens to make cars, rather than an automaker developing AI. Swiss bank UBS downgraded Tesla to sell from neutral in July amid concerns that Tesla shares had “risen too fast, too quickly.” On Wednesday, UBS analysts strengthened their sell recommendation, saying Tesla is “priced not on cars (or even energy), but on autonomy and AI, including its robotaxis and Optimus Robots efforts.” The bank’s analysts said Tesla’s stock “assigns a high value” to these ventures, even though they are “difficult to value,” leaving the company vulnerable if market optimism about AI worsens. Based on this, they see a risk of a 20% drop in Tesla shares.
Chief Reviewer
Musk himself has said Tesla’s future value lies in self-driving, the UBS report said. “The challenge is that the timeframe and likelihood of success are unclear,” the analysts said, noting that Tesla itself has warned about the challenges it faces in rolling out robotaxis, its most advanced self-driving project, which has been repeatedly delayed and must clear both regulatory and technology hurdles.
Points to note
The company said it will unveil a robotaxi prototype on October 10. The technology is expected to be a fully autonomous vehicle that doesn’t require supervision, making it the closest the company will get to fully autonomous technology on the market. Analysts at Wedbush said the day will mark the beginning of “Tesla’s AI story,” predicting it could be worth $1 trillion in the next few years.
Important Quotes
Musk said in April that the company plans to spend about $10 billion on training its AI systems in 2024 alone, saying that “companies that don’t make this level of investment efficiently can’t compete.”
Forbes Rating
Musk is, by far, the richest person in the world, with an estimated net worth of $248.7 billion. Much of his wealth comes from the companies he co-founded and runs, notably Tesla, rocket company SpaceX, tunnel-boring company The Boring Company, and AI startup xAI. He also owns social media platform X, which he acquired in 2022.
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